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Research summarySeparating the individual from the social effects of incentives has been challenging, because of the possibility of synergies in team production. The authors observe a unique natural experiment in a South Korean e-commerce company, in which a switch from pay-for-performance to fixed (but different) salaries took place in a staggered and effectively random manner across employees. In this case, social and individual effects perspectives make opposing predictions, enabling a critical test. They find evidence consistent with social effects of incentives, particularly as predicted by goal framing theory. The results have implications for the design of incentives to foster collaboration, organizational learning, and organizational performance.

Managerial summaryManagers often neglect the deeper hypothesis behind pay-for-performance schemes—that people primarily care about how much they are individually paid. An opposing school of thought contends that incentives have social effects too—that individuals care about not only what they receive but also what their peers receive. It is difficult to say whether individual or social effects would be more salient in a context, without a proper experiment with randomization. The authors exploit a rare opportunity, provided by a company that changed its incentive system in a random order, thus unintentionally creating a natural experiment. The results strongly validate the existence of social effects of incentives, but also make the general case for the opportunity to learn from experimenting with organization design in a systematic manner.

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